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Blackberry Mulling Strategic Options

Struggling Canadian smartphone manufacturer, BlackBerry Ltd (BBRY) has finally decided to divest its entire stake to a consortium headed by Toronto-based insurance company Fairfax Financial Holdings Ltd for $4.7 billion or $9 per share. Since Fairfax already holds 10% of BlackBerry’s stocks, the buyout will lead to the latter’s privatization.

Both Fairfax and BlackBerry have been offered a six-week due diligence period before the transaction can be completed. During this period, BlackBerry can explore better bids. However, if BlackBerry exits the deal, it will have to pay nearly $155 million to Fairfax but if Fairfax reduces its offer below $9 without BlackBerry’s approval then the company will be spared the $155 million fine. However, after the definitive agreement is signed, the termination charge may scale up to 50 cents per share.

A few days back, BlackBerry reported dismal preliminary results for the second quarter of fiscal 2014. The stock price fell sharply following the results.

BlackBerry anticipates GAAP net loss of nearly $950 million to $995 million or around $1.81 to $1.90 per share for the second quarter of 2014, mainly attributable to written-down unsold devices costing between $930 million to $960 million. Moreover, it expects revenues for the second quarter of fiscal 2014 to be $1.6 billion, down 45% year over year while smartphones sales are expected to be 3.7 million, down 50% year over year.

BlackBerry, which led the smartphone market earlier, has failed to upgrade its operating platform. This has led to loss of market traction to Apple Inc.’s (AAPL) iOS and Google Inc.’s (GOOG) Android operating systems during the past few years, resulting in huge losses.

Despite launching its new operating platform BB10 coupled with LTE-based high-end touch screen smartphones, the company has failed to recoup its smartphone business. In the second quarter of 2013, the company’s operating system held a mere 2.7% of the global market share as compared to Android’s 79% and Apple’s 14.2% market share. Samsung and Apple sold 71 million and 31 million smartphones, respectively, over the same time frame.

Likewise, another mobile phone giant, Nokia Corp. (NOK) has also decided to sell its struggling handset business to Microsoft Corp. (MSFT) for $7.2 billion. The company implemented all sorts of strategies to revamp its handset business but failed to compete against iOS and Android operating systems.

Despite BlackBerry’s decision to go private, we remain highly apprehensive about the company’s future growth prospects. Moreover, the company plans to consolidate its market share with a less attractive BB10 OS platform supported with only four smartphones, which include two entry-level devices and two high-end devices.